Linda\'s Luxury Travel (LLT) is considering the purchase of two Hummer limousine

Question

Linda's Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows: Initial investment (2 limos) Useful life Salvage value Annual net income generated LLT's cost of capital S1,320,000 10 years S 130,000 121,440 15% Assume straight line depreciation method is used. Required: Help LLT evaluate this project by calculating each of the following: 1. Accounting rate of return. (Round your percentage answer to 1 decimal place.) Rate of Return 2. Payback period. (Round your answer to 2 decimal places.) Years 3. Net present value. (Future Value of $1, Present Value of $1, Future Value of $1, Present Value Annuity of $1) (Use appropriate factor(s) Table or Calculator Function: Cash Outflow (Beginning of the Year) Present Value Table or Calculator Function: Cash Inflow (for Next 10 Years) Table Factor Present Value Table or Calculator Function: Cash Inflow (for 10th Year) Table Factor Present Value Total Net Present Value 4. Without making any calculations, determine whether the IRR is more or less than 15%. O Greater than 15% O Less than 15%

Explanation / Answer

Accounting rate of return= Average annual profit/Average Investment

Average annual profit: 121440*15%= $18216

Average Investment= 1,320000/10= $132000

Therefore, ARR= 18216/132000*100= 13.80%

2. Payback period

Payback Period =Initial Investment/Cash Inflow per Period

                            = 1,320,000/121440

                           = 10 .87 years

Computation of NPV (in $) Table or Calculator Function: Cash Oytflow (beginning of year) 1320000 n= 0 i= 15% Present Value 1320000 Table or Calculator Function: Present Value Annuity of $1 Cash Infow (for next 10 year)
(121440+{(1320000-130000)/10} 240440 n= 10 i= 15% Table Factor 5.0188 Present Value                                  1,667,546 1206720.272 Cash Infow (for 10th year) 130000 n= 10 i= 15% Table Factor 0.2472 Present Value                                        34,608.00 32136 Total Net Present Value                                      -37,846 -81143.728

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